4 Ways Credit Cards Can Still Penalize Borrowers

Last weekend, the final changes to the credit card industry spurred by the Credit CARD Act of 2009 went into effect for all credit card accounts, including existing accounts. While the goal of the new legislation and resulting regulation is to protect consumers by clarifying the terms of using credit and by banning some unscrupulous practices like two-cycle billing and the incredible shrinking grace period, there are still lots of opportunities for credit card companies to overcharge, manipulate, and trap their customers.

Here are a few dangerous changes credit card issuers can make to a customer’s agreement while in compliance with the regulations.

1. Cards can charge high penalty fees. In normal circumstances, credit cards issuers must limit penalty fees, like those for late payments, to $25. If a credit card user incurs repeated fees — whether due to negligence or to the loss of a job — the credit card company is free to increase these penalty fees. In these cases, there is no limit to the types of fees conjured up by the issuers. While each fee might have a limit, the next few years might see new fees.

2. Cards can increase interest rates. Many credit card companies already raised interest rates in advance of the new regulations taking effect. When asked, some issuers blamed the rate increases on the economy or changes in customers’ credit reports, but it’s pretty clear the main catalyst was the upcoming regulations and anticipation of earning less money from customers in the future.

While credit card issuers must give 45 days’ notice before increasing a customer’s interest rate on future purchases due to changes in their risk profiles, customers who violate their credit card agreements by paying late will be subject to an unregulated default rate.

In addition, although the new regulations stop credit card companies from increasing interest rates on existing balances, most credit cards have already circumvented that rule by changing “fixed” interest rates (which were never truly fixed anyway) to variable interest rates. Variable interest rates can change, even on existing balances. Furthermore, credit card issuers can increased “fixed” interest rates on existing balances if the customer hasn’t paid the bill for a certain amount of time.

3. Credit cards will reduce benefits. Benefits like cash back, concierge services, and points or miles accumulation will become less lucrative and less available for the consumer. We’ve already seen the disappearance of free 0% APR balance transfers, and 0% introductory interest rates for purchases are harder to find.

4. Annual and other fees have a high maximum. The new regulations require credit card companies to limit annual and other fees to 25 percent of the initial credit limit in total. This is an opportunity for issuers to raise annual fees. While a card with a $500 credit limit must be limited to a $125, a card with a $10,000 could carry an annual fee of $2,500! While a fee that high is not likely unless you have a very exclusive card, I expect more cards that have been free will start sporting annual fees and those that already carry fees will become more expensive.

The best result of the Credit CARD Act of 2009 is that it brought some of the credit card issuers’ tactics into public awareness. Unfortunately, some credit card users, particularly those who for whatever reason don’t play by the companies’ rules, don’t pay balances off every month, or don’t diligently make payments on time, will likely find that mistakes will be more costly than ever before.

I think this post misses the mark on a few points. I know it is attempting to be informative about the new rules but it is a bit misleading.

1. Yes, the first late fee or returned check fee is limited to $25. The financial institution can then charge $35 if the consumer makes the same mistake in the next sixth months (it is not unlimited). If the consumer pays on time for six months, the financial institution is back to the $25 max. [This all assumes the financial institution uses the "safe harbor" rather than follow its own cost-analysis for fees - which might only be done by really large banks].

2. “While credit card issuers must give 45 days’ notice before increasing a customer’s interest rate on existing balances…” Financial institutions are no longer able to increase the APR on an existing balance (unless the consumer is 60 days delinquent). That change when into effect in February. The financial institution can give 45 days notice to increase the APR on future transactions.

3. “The new regulations require credit card companies to limit annual fees to 25 percent of the initial credit limit.” The new rules actually go farther than just annual fees. Financial institutions are limited on the total of fees (excluding late payment, returned item fees, and over-the-limit fees). Thus, balance transfer fees, foreign transaction fees, annual fees and other fees the financial institutions charge can not be more than 25% of the initial credit limit. This is laid out in 226.52(a) of Regulation Z.

It is kind of difficult to determine which information you are referencing about the new rules as each link is internal. Perhaps this is your individual take on the Credit CARD Act’s implementations, it is hard to tell.

While it seems like my comments are being nit-picky, it is difficult to resist when your throw away comments imply that financial institutions and credit card companies have huge loopholes as “there are still lots of opportunities for credit card companies to overcharge, manipulate, and trap their customers.”

Of note, I do not work for a financial institution but I do work trying to explain the new laws and regulations to financial institutions. It is bit discouraging to find inaccurate information being used to show that financial institutions are trying to gouge their customers. Most institutions I work with are trying to understand the new rules and make sure they are in compliance.

I didn’t realize that if credit cards have to be “nicer” to the consumer, they can also cut back on rewards. That’s a good point; if they can only charge you $25, they can also take back the cash back rewards and any other point system they may go on

Thanks for those corrections, Steve. Most of my information comes from a variety of legitimate and trustworthy sources, and I’ll verify where there are some questions. I’ll update the article as appropriate.

Flexo, no problem. Part of the confusion comes from the fact that the Federal Reserve has some flexibility when implementing the Credit CARD Act. The Act itself is pretty detailed in its requirements – but the Fed has authority to interpret the rule. For example, the Act stated that penalty fees need to be “reasonable and proportional.” The Fed then took that and stated that $25 for a first violation is reasonable but if the consumer makes the same violation in the next six months, then $35 is reasonable.

With the Fed’s interpretations – located in Regulation Z – the devil is truly in the details. And, this makes it really confusing to everyone involved (financial institutions, consumers, journalists, bloggers – everyone).

It may also be helpful to point out that many people are turning to branded prepaid cards (with an American Express, Discover, MasterCard or Visa logo) as alternative to credit. They work like traditional debit or credit cards and offer many of the same fraud and loss protections. The big difference is that they access funds pre-paid for the cardholder. They have a low cost, built-in spending control and even savings features in some cases.

One specific audience that is finding prepaid cards particularly useful is college students. As you point out, today’s credit environment is challenged, and one of the new rules outlined by the CARD Act states consumers under 21 cannot open a new credit card account without either a co-signer or proof of enough income to guarantee payment of the debt. For college students looking for an affordable electronic payment tool prepaid cards fit the bill.

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